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Employee-Owned Businesses Raise the Bar for All

The words "employee-owned business" once evoked small shops with lofty ideals but sloppy business practices. But today, employee-owned businesses like John Lewis Partnerships deliver impressive results, raising the bar for the rest. They show greater resilience in a recession. They earn loyalty from customers and suppliers. They move nimbly in tough markets. Insights from today's leading employee-owned businesses can be applied broadly, pointing the way toward a more robust and sustainable economy.

Large, Successful Employee-Owned Businesses Lead the Way

John Lewis Partnership is a large successful employee-owned corporation described by Marjorie Kelly of Tellus Institute in her new book Owning Our Future: The Emerging Ownership Revolution. John Lewis Partnership owns the biggest department store chain in England, the Waitrose supermarket chain, and other brands. With $13.7 billion in 2011 revenues and 81,000 employees, it would rank in the Fortune 200. With revenues up about 7.4 percent annually over the past decade, it grew faster than Macy's. It stayed profitable throughout the Great Recession. Perhaps most importantly, and unlike many big retailers, it succeeds while providing fair compensation (including pensions) and giving employees control over the business.

Achieving High Performance Under Employee Ownership

But how does John Lewis Partnership defy the conventional wisdom that employee ownership prevents management from acting quickly and making tough decisions? The company owes its success to a well-designed system of governance, pay, and capital structure.

First, John Lewis Partnership governs itself in a way that promotes nimble decisions while staying accountable to the employees who own it. Employees (called "Partners") elect an 82-person governing body called the Partnership Council. The Partnership Council in turn elects about one third of the board. The Partnership Council has the power to dismiss the chairman (but has never done so). These checks and balances give employees real power, yet the chairman can act quickly and decisively.

Second, John Lewis Partnership inverts the typical relationship between investors and employees. At most businesses, outside investors have ultimate control. At this company, capital is seen as important input to business success, but outside investors do not control the business. To preserve 100 percent employee ownership and protect John Lewis Partnership from the pressures of day-to-day stock moves, the company does not sell its equity. It raises the money it needs using loans and bonds, financed in part by employees and customers.

"Owning our own capital allows us to take a longer term view than many conventional PLC [public limited company] organizations," says Patrick Lewis, Partners' Counsellor of John Lewis Partnership. Lewis represents the employees' interest in the ownership structure. "That gives us a significant advantage in the market—to the benefit of all our stakeholders—including our partners/employees."

Third, the organization's payroll is highly flexible. In good times, employee bonuses have boosted yearly pay by as much as 24 percent. (The bonus payout percentage is the same from lowest pay grade to the top, which means all employees share equally in both pain and gain.) Flexible pay helps cushion the company against downturns. It reduces the depth and duration of layoffs. The flexibility and fairness of the compensation system helps John Lewis Partnership retain an experienced and motivated staff that can spring into action when the economy improves.

Finally, the company enshrines its priorities—serving its employees—in a binding, written constitution. The constitution can only be changed by vote of the Partnership Council, which is controlled by employees.

John Lewis Partnership is part of a paradigm shift from "extractive ownership" to "generative ownership," as Kelly explains in her book. "Extractive ownership puts short-term financial gain above all else," she says. "Generative ownership returns economies to their original purpose, which is to advance human well-being." John Lewis Partnership certainly fits the generative model. Its stated purpose is the "happiness" of its staff, which results from "worthwhile and satisfying employment in a successful business."

Build a Sustainable Economy Based on the Generative Model

Employee ownership leads to high performance among U.S. companies as well. John Lewis Partnership is not unique. American companies with substantial employee ownership often outperform those without, with lower staff turnover, higher trust, and greater shareholder value according to research done at Harvard and Rutgers.

Publix Super Markets, the largest employee-owned company in the United States, has over $24 billion in revenue and more than 140,000 employees. Since inception, its closely-held stock has risen more than 19 percent per year, twice as fast as the S&P 500 index. Publix ranks among the "100 Best Companies to Work for in America."

We need more companies like John Lewis Partnership and Publix in the United States. We need businesses that innovate and grow with less need for layoffs that consume costly public services and damage long-term competitiveness. We need more businesses that operate for the long term, not just the next quarter.

Our tax and regulatory policies should encourage more businesses to operate like John Lewis Partnership. For example, let's stop rewarding companies for moving offshore. Instead, let's reward companies for adopting innovative ownership and pay structures. When companies get into trouble so deep that they need a bailout, let's seize the opportunity for change. Eliminate the bad incentives that led the business astray. If a bailout is needed, it should come with a new governance and compensation structure that motivates both workers and management toward long-term success. One company at a time, we can create a better, more sustainable economy.